A close look at the luxury market in the GCC

The luxury market in the Gulf has enjoyed three decades of rapid growth, and is currently transitioning toward a more mature phase, characterized by a moderate growth. The industry is now dealing with more sophisticated consumers which demand diverse shopping destinations away from large-scale malls, a customer-centric approach and a greater availability of online shopping tools such as e-commerce websites and social media platforms to get inspiration and to buy products.

Luxury in the Gulf has been a fast-paced journey, which has fuelled the evolution of the luxury offer and retail format in the region, resulting in world-renowned malls, the proliferation of stand-alone boutiques, the arrival of international department stores, and the emergence of multi-brand concepts.

For decades, GCC consumers have been considered followers of Western trends and particularly of logo branded products, but thing have changed, and the region is now leading the way with its own unique trends and needs.

NEW TRENDS FOR THE LUXURY MARKET

Consumers are increasingly moving away from the materialistic approach to luxury, they are now looking for niche labels, unique pieces from well-known brands, more diverse shopping destinations and above all, they are interested in luxury as an ‘experience’ and as a way to express themselves.

Moving away from large-scale malls While for many years Dubai focused on building large-scale malls (like Dubai Mall or Mall of the Emirates), now there is an increasing trend towards community malls (such as Nakheel at Jumeirah Park Pavilion, Sunset Mall) and districts with open-air or street-front stores (such as The Beach in JBR or CityWalk in Jumeirah). Those diverse retail formats are being developed to address the ever-increasing demand for a more diversified variety of shopping destinations. By contrast, some other GCC countries like Saudi Arabia, are still developing large – scale malls with a luxury positioning (like the Al-Diriyah Festival City Mall and Riyadh Avenue Mall).

The fall of luxury as a status symbol Chalhoub Group and Bain & Co in 2015 found that that luxury consumers have begun to move away from a materialistic take on luxury towards the appreciation of luxury for the feeling of accomplishment and the enjoyment it brings. Traditionally luxury consumers in the Gulf were driven by status and reassurance, they were buying luxury good to reach social acceptance and peer praise. Today more consumers are using luxury as a way to express themselves, they are searching for unique pieces in the range of well-known brands and they are more receptive towards less known designers. They are very active on social media; they go online to keep up to date with new trends and to post their own opinions and advice. Millennials are pretty much falling into this category; they tend to define themselves by what they experience rather than by what they own.

The rise of new market categories Traditionally, the prestige beauty market was driven by fragrance, but now it is moving towards an increased selling of make-up products – especially in the UAE. While fragrance still represented 56% of the overall Gulf prestige beauty market in 2015, its market share was down by 3% from the previous year. Concurrently, the make-up market share grew to 37% of the overall Gulf market. Skincare remains relatively small, at 7% market share. New retail formats are also changing the beauty scene across the region, with the boost in niche fragrance brands, stand-alone shops (such as MAC, Make Up For Ever and Bobbi Brown) and the success of Sephora. Other changes impacting luxury include a move towards casual wear (the sneaker phenomenon for example) away from formal wear; and the return of jewellery at the expense of watches. The strong attachment that local consumers have towards traditional rituals is also obvious in the emerging interest in halal make-up and designer abaya collections.

E-commerce and digitalization In a region where internet penetration is extremely high (91.5% in Qatar, 90.5% in the UAE and 63.7% in Saudi Arabia, against 87% in the USA), e-commerce is growing year after year (doubling its size in 2014 and growing by 50% in 2015). Consumers are increasingly on-line, using social media such as Facebook, Instagram and Snapchat to connect with each other, share good experiences with like-minded people and interact with brands. Millennials are helping drive this trend, by transitioning consistently from online shopping to in-store experiences in their chase for the best products.

CHALLENGES AHEAD

Beside the customer behaviour changes, the market is also facing well-known and new issues. Retail costs remain high due to expensive rents, high level of employee turnover and strong demand for skilled in-shop sale staff. Up to now the luxury segment’s growth has been driven by the opening of new retails destinations, but the market is now reaching its saturation point, therefore it will be increasingly more difficult for luxury brands to drive their future growth by opening new shops.

Strong local currency The strong appreciation of the region’s dollar-pegged currencies has made goods priced in local currencies more expensive, both to residents and tourists, especially those coming from Europe, Russia and China.

Soaring cost of rent The strong appetite for well-knowns brands to penetrate the Gulf markets kept the costs of the available retail spaces rather high, especially in key locations such as well renowned malls. Rental rates are comparable to those found in some of the world’s most prestigious locations, such as the Champs-Elysées in Paris – though not as high as in New York or London.

High staff turnover Staff costs have risen over the past few years due to higher indirect costs such as recruitment, training and administrative management. Customers are expecting at least the same service standards as in Europe, therefore companies must invest in training and development. Traditional high level of staff turnover is impacting recruitment and administration spending adversely.

Market saturation – competition between brands The luxury brand presence has now attained levels close to saturation across the region. Dubai was recently ranked second behind London in the percentage of global brands presence, while Kuwait City was ranked 11th.

HOW TO WIN CUSTOMERS IN THE LUXURY SECTOR

Brand knowledge The still-common practice of hard selling a product is no longer an effective sales strategy. In fact, it induces mistrust and raises questions about quality and whether the product is outdated. Instead, brands need to help consumers immerse themselves in the very essence of the brand DNA. Staff should be knowledgeable and able to talk with customers about the brand’s history, heritage and values.

Customer recognition – Do you know who I am? Traditional customer relationship management (CRM) techniques (e.g. loyalty programmes based on point accumulation and redemption) are not sufficiently appealing to customers. To successfully engage luxury customers, brands must make them feel appreciated and welcomed at each interaction. For instance, Gulf nationals are particularly pleased when they are recognised by name. That is why luxury brands in the region should ensure that each customer is treated as a unique individual. As revealed in the Chalhoub Group’s consumer research, 82% of luxury consumers expect brands to recognise loyal customers and 77% expect brands to recall a customer’s tastes and preferences.

Customer experience

In-store experiences represent an opportunity for brands to go the extra mile to deliver surprises and feel-good attention to strengthening the brand-customer relationship. Sophisticated customers in the region like to be ‘wowed’; it is about touching their hearts and dazzling their senses as soon as they step into the store. To do so, the in-store experience has to offer memorable moments that immerse customers in the brand environment. Industry operators should also keep in mind that customers expect equally rich brand experiences offline and online.